Are business credit card rewards taxable?

Are credit card rewards taxable income?

Whether your credit card rewards are considered taxable income comes down to whether your rewards are received in the form of cash. Signup bonuses in the form of cash deposited into your account and cash bonuses for referring a friend are two examples of rewards that would be considered taxable income.

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When your rewards are taxable, you’ll receive a 1099-MISC form from your credit card provider. This form summarizes the amount of income you earned via your rewards and can be used to file your annual taxes. Note that you may not receive a form if your cash rewards are under $600, but you’re still required to report that income on your taxes.

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For other types of rewards, you'll find that the IRS considers most of them to be a rebate on money already spent. You make a purchase, and then your credit card company provides a rebate that you can spend on goods that don't necessarily increase your wealth like a salary would.

How do business credit cards affect taxes?

With a business credit card, most purchases and the associated fees are tax-deductible. However, this only applies to business purchases made with your own money. Business expenses paid for with credit card reward points are not tax-deductible.

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For example, let's say you book plane and hotel reservations for five employees. You use frequent flyer miles from an airline-branded credit card to cover half of the plane tickets' cost. In this scenario, you can only write off the expenses for half of the plane tickets and the hotel reservations since you paid for that portion of the trip out of pocket.

Do business cards report to the IRS?

No, business credit cards themselves do not report to the IRS. However, financial institutions can track transactions made through business credit or debit cards, and those institutions may report to the IRS under certain circumstances, such as in the case of large transactions or other activity that triggers reporting requirements.

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As a business owner, you’re required to report all income and business expenses to the IRS, regardless of whether they’re purchased through a business card or other means.

Don't get caught cheating

It's crucial to note that attempting to game the system and convert business credit card rewards into cash could lead to legal trouble and significant financial repercussions. In a 2021 court case, a couple was ordered to pay taxes on over $300,000 in profits accumulated through an American Express rewards program.

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To avoid complications, be sure to use your rewards points as intended by your card provider, rather than trying to cash them out for money orders or other cash equivalents. Aggressively spending and then redeeming rewards points for reloadable debit cards that are then converted into wire transfers could potentially lead to the reclassification of your rewards as taxable income.

Types of business credit card rewards

Now, let’s break down the most common business credit card rewards and how your business can earn and use them. We'll cover the three most popular reward types, along with a few other perks that many cards now offer to attract the most qualified business owners.

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Can you use business credit card rewards for personal use?

Yes, you can use business credit card rewards however you like, including for personal use. There’s no requirement to use credit card reward points for business travel or expenses.

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You might consider accumulating points through regular business expenses and then using the rewards for personal travel or online purchases. Although you'll have to pay out of pocket for business travel, you can deduct those expenses on your taxes. Personal trips, on the other hand, aren't deductible, making them the best use for your reward points and miles.

How are credit card rewards treated in accounting?

Credit card rewards can be treated differently in accounting depending on the rewards and the accounting policies of a business. Here are some common considerations regarding the treatment of credit card rewards in accounting:

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1. ‍Reduction of expenses: Often, credit card rewards such as cash back are treated as a reduction in expense. When you receive cash back on purchases, you could account for this by reducing the expense associated with the purchase.
2. ‍Other income: Alternatively, some businesses might record cash back or other credit card rewards as other income in their financial statements. This approach separates the rewards from the associated expenses, making it easier to track and understand.
3. ‍Deferred revenue: In some cases, especially with point or mile rewards, you might treat the rewards as deferred revenue, recognizing the income when you redeem the rewards.
4. ‍Non-monetary exchanges: If you’re redeeming points for goods or services, it might be treated as a non-monetary exchange. The fair value of the goods or services received would be recorded in the appropriate expense account. The correct accounting treatment for credit card rewards will depend on the accounting framework you use (such as GAAP or IFRS) and the type of rewards. It might be wise to consult with an accounting professional to make sure that you’re accounting for credit card rewards correctly and in compliance with accounting standards.

Ramp can simplify expense management and tax deductions

Whether you make business purchases with a credit card, debit card, or cash, it doesn't matter to the IRS. It is your responsibility to know what is taxable and what is not. That's why Ramp was designed to integrate seamlessly with popular accounting platforms.

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Ramp also enables you to quickly log receipts and categorize your expenses in real time. You have complete control over account spending limits, empowering every member of your team to spend responsibly and within budget.

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The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.